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Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020

03 June 2020

#Property & Real Estate, #COVID-19

Peter Nugent

Published by Peter Nugent

Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020

The Retail Shop Leases and Other Commercial Leases (COVID-19 Emergency Response) Regulation 2020 (COVID Regulation) is made under the COVID-19 Emergency Response Act 2020 (COVID Act) with the purpose to implement the National Cabinet Mandatory Code of Conduct (National Leasing Code).

Are there any issues or problems?

The COVID Regulation is quite like the Victorian equivalent, but seem to be more comprehensive and the application of the dispute resolution provisions is more certain. For more information about equivalent legislations in other states, download our legislation compendium here

If there is a problem in practice, disputes must be taken to the Queensland Civil and Administrative Tribunal (QCAT).

When does the Regulation commence?

The Regulation commenced on 28 May 2020.

What leases are covered?

The COVID Regulation applies to leases covered under the National Leasing Code, with some limited exclusions. 

The covered leases are retail and commercial leases to tenants that have a total turnover of less than $50 million and qualify for the JobKeeper subsidy. The turnover threshold applies to corporate groups as a whole, but to franchised business individually.

The excluded leases are some farming business leases and certain leases under the Land Act from the State.

Negotiations for rent support

The starting point and process

Landlords and tenants of affected leases may require a renegotiation of the lease terms.

Importantly, there are obligations of full and frank disclosure of relevant economic and other circumstances of both parties, such as financial statements, turnover, subsidies, support and waivers from mortgagees and franchisors.

The following process is provided in the Regulation:

  • either party gives a notice to start the negotiation
  • both parties must make the full and frank disclosure of relevant information
  • the landlord then has 30 days to make an offer to the tenant. 

The 30 days start from when both parties have provided the full and frank information.

The parties must negotiate reasonably and in good faith.

The landlord’s offer

The landlord must offer a rent reduction on the following basis:

  • a waiver of at least 50 per cent of the total rent reduction
  • considering all the circumstances of the lessee and the affected lease, including reduction in turnover for the premises
  • considering the respective capacities of the landlord and tenant to cope with the economic effects of the COVID emergency and any reduction in rent. 

What about reductions in outgoings?

A saving in outgoings will necessarily be passed on with a net lease. It seems for a gross rent that a saving in outgoings must be included in the rent reduction offered by the landlord.

What about existing agreements for the COVID emergency?

Some landlords will no doubt have already reached agreement with their affected tenants. Those existing agreements are preserved, but the COVID Regulation includes a right to ask for a further reduction that must then be negotiated. That seems to be a one-way street as the landlord is not given the right to renegotiate to increase the rent payment. If the tenant asks for a further rent reduction, then the requirement for a 50 per cent waiver does not apply.

Dispute resolution for negotiations

The COVID Regulation provides for mediation as a first step if there is a failure to agree. If the dispute continues then it can be taken to the QCAT for resolution.

The QCAT has wide powers to make orders to implement the National Leasing Code expectations.

Repayment of deferred rent

The deferred component of the rent reduction is:

  • interest free
  • can be claimed from 1 October 2020
  • must be amortised in an agreed way and over an agreed period of at least two years and not more than three years.

Dispute resolution applies to the repayment agreement as well. 

Other impacts during the Response Period

Rent reviews

Rent reviews are still carried out during the Response Period but the rent increase does not start until 1 October 2020. There is no clawback for the rent increase and it is not part of the deferred rent reduction.

Term extensions

If a rent reduction is agreed (or imposed), then the landlord must also offer a term extension for the reduction period. This would apply to pre-existing agreements to reduce or defer rent. However, the landlord need not offer the extension if that would cause a breach of another agreement or interfere with other commercial purposes of the landlord, such as a planned redevelopment.

The tenant is not bound to accept the offer.

Restriction on “Prescribed Actions”

What are they?

A Prescribed Action is defined in section 9 as any sort of enforcement action under the lease or a lease security or the exercise of any other right by the landlord. That definition would include the exercise of relocation or demolition clause rights. It also would include the termination of a periodic tenancy.

The basic rule

A landlord must not take a Prescribed Action after 28 May 2020 on any of the following grounds:

  • the tenant not paying rent or outgoings during the Response Period
  • the tenant not being open for business in the premises during the Response Period. 

But there are exceptions.

The exceptions

Prescribed Actions are permitted:

  • in accordance with an agreement made under the COVID Regulation, including to resolve a dispute, or an order of a court or tribunal
  • a substantial failure by the tenant to comply with an obligation about negotiations under the COVID Regulation; or
  • on a ground not related to the COVID emergency.

The final exception will protect rights under relocation clauses and so forth. To be protected, the tenant would need to show that the landlord’s true motivation for any action is factors applying to the COVID emergency. That could still be interpreted quite widely, for example, if the failure of some tenants because of the COVID emergency is a reason that the landlord brings forward redevelopment plans.

Effect on current Prescribed Actions

If a Prescribed Action was commenced on or after 29 March and not finalised by 28 May 2020, and relates to a breach in the Response Period, then that Prescribed Action is suspended until after 30 September 2020. If the Prescribed Action was finalised before 28 May 2020, then that stands.

For example:

  • a default notice issued by a landlord on 20 May 2020 with a remedy period of 14 days is suspended and cannot be enforced
  • if a default notice was issued on 1 May 2020 and the tenant was locked out on 27 May 2020 then that lease is effectively terminated.

Author: Peter Nugent

Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.

Peter Nugent

Published by Peter Nugent

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